The end of the cheese exchange

DAIRY farmers have long moaned that the National Cheese Exchange did not smell quite right. They can complain no longer. The exchange, in Green Bay, Wisconsin, has closed its doors, replaced on May 1st by a cash market for bulk cheddar on the Chicago Mercantile Exchange.

The National Cheese Exchange was a small market with big influence. Even though it handled less than 1% of the cheese sold in America, its prices were used to set terms for private contracts throughout the land. And therein lay the suspicious stench. Would it not be possible, dairy farmers wondered, for a large firm to drive prices down in Green Bay in order to save money on vast quantities of cheese purchased elsewhere? Indeed, why was Kraft Foods, a company that buys or makes 1 billion pounds (454,000 tonnes) of cheese a year, a net seller in Green Bay for six consecutive years?

Simple, says Kraft. It maintains a “safety stock” of cheese rather than risk a shortage which might lead to a permanent loss of market share. When the surplus becomes excessive, it unloads the extra cheddar, sometimes at a loss. The Federal Trade Commission, the Commodity Futures Trading Commission, the Department of Justice, Wisconsin's attorney-general and even a Governor's Task Force on Cheese Pricing all investigated Kraft's activity on the National Cheese Exchange. None found evidence of criminal manipulation in Green Bay. But this did not blunt the ire of Wisconsin's 25,000 dairy farmers, many of whom blamed the exchange for the increased volatility of cheese prices.

The Chicago Mercantile Exchange should be an improvement in several respects. First, cheese trading is now subject to the Merc's internal surveillance and regulation, a system equipped to sniff out market manipulation. Second, the Merc can expand what has been a notoriously thin market. In Green Bay, buyers and sellers had to be physically present. Now, cheese can be traded through brokers, anonymously, just like silver and pork bellies. Most important, the Merc plans to add a cheese futures market by the end of the year. That should let farmers use the exchange to manage their risk, not just to sell their cheese.